Top Or Pause?

The euro/dollar hit its 2007 low early in mid- January around $1.28 and began to rally toward $1.36, driven higher by concerns about the U.S. economy (Figure 2). The greenback weakened amid a backdrop of disturbingly low growth in the U.S., which was weighed down by a recession in the housing market and a major inventory overhang in both the housing and auto industries.

Speculation was rampant within the financial markets regarding U.S. Federal Reserve rate cut action during the first several months of the year. Economists and traders thought the Fed might have to cut monetary policy to support limping growth numbers. Traders had priced one and even two rate cuts in the U.S. in 2007 into early April.

In the first quarter of 2007, the U.S. posted its slowest growth in more than four years with a 0.7-percent (year-over-year) gross domestic product (GDP) reading. The U.S. actually under-performed the Eurozone’s robust 3.0-percent first-quarter GDP reading. The retreat in the housing sector was a big weight on GDP growth. David Powell, currency analyst at Ideaglobal, notes that in the first quarter residential fixed investment plummeted 15.4 percent on an annualized basis.
“That was a huge drag on U.S. GDP,” he says.